Risk Management, Compliance & Control

The history of financial markets, particularly the recent subprime crisis, and the resulting social uproar, has brought politicians and regulators across different geographical locations to enforce harder regulations on the financial industry.

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Wether market, reputational or legal, Risk has been taking a central stage in the financial industry in the past few years and a change in trend as for its increased importance seems unlikely. EQRC has been in the forefront of the changes in the regulatory landscape going from market risk [for linear products ( download relevant paper), to non linear products ( download relevant paper)] to reputational and legal risk more specifically associated to the violations of the Client Best Interest Rule and the Misleading Statements and Actions rules ( download relevant paper) which all state in spirit that if one works for an authorised financial firm and also sells financial products, then one must act with integrity, for instance, by not misleading clients. The duties of an Approved Person are given in Section 2 of the Financial Services and Markets Act (FSMA 2000) more specifically the four statutory objectives which it shares with EQRC:
– Maintaining Confidence in the Financial System,
– Promoting Public Understanding,
– Protecting the Consumers
– Reduction of Financial Crime.
EQRC Statements of Principle for its consultants are the same as for the FCA definition for Approved Persons:
– Integrity,
– Skill, care and diligence,
– Proper standard of market conduct,
– Dealing with the regulator in an open way,
– Proper organisation of business,
– Skill, care and diligence in management
– Compliance with regulatory requirements.

Along with these concepts which the financial industry is familiar with, EQRC has also recently taken step to expose other less intuitive concepts equally if not detrimental to the industry in general which original content made the cover story of Wilmott magazine ( download relevant paper).

download our risk papers

“the misleading value of measured correlation”.
download

“UTOPE-ia”.
download

“the non misleading value of inferred correlation, an introduction to the cointelation model”.
download

“The strength of a nation derives from the integrity of the home.”
– Confucius

“Subtlety may deceive you; integrity never will.”
– Oliver Cromwell

“The supreme quality for leadership is unquestionably integrity. Without it, no real success is possible, no matter whether it is on a section gang, a football field, in an army, or in an office.”
– Dwight D. Eisenhower

Pro bono advisory for litigation with a mathematical component

EQRC may participate on a pro bono basis to litigations especially in situations in which a scientific argument would be at stake and where a whistleblower would need support.
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Contact & Agreement Phase

The first step in litigation, is to contact us in order to explain what the mathematical argument at stake is so that we can give you our impartial feedback.

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Interaction Phase

The second phase requires that each party interacts with each other and the judges around the technical argument so that each party asses its chance in court.

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Litigation

The judges need to hear the different witnesses for each party in the context of that specific argument as well as its legal & political ramification.

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Judgement

At this point the judges have deliberated and make their decision public. Whether you have won or lost, your solicitor will tell you what to do and how we can help.

Expertise in "co-movement" Modelling

Within the framework of the financial industry, when representing relationships between assets, correlation is typically used. However, academics have long since questioned this method due to the plethora of issues that plague it. Indeed, it is thought that some components of cointegration are a natural replacement in some of the cases as it is able to represent the physical reality of these assets better at different timescale. However, despite this general academic consensus, financial practitioners refuse to accept cointegration as a better tool, or even the lesser of two evils.

EQRC has attempted in the past to explain this bias, specifically focusing on the various consequences of model selection considering the new and challenging regulatory environment and suggests a practical replacement hybrid alternative to both cointegration and correlation that it has named cointelation.This concept comes together with growing evidence for power law-type scaling of correlation with time, a concept rooted in the original study by Benoit Mandelbrot on concentration of risk. We have also completed the cointelation model recently introduced via a statistical test, which uses measured correlation in different time gaps. We also provide an approximation of the expectation in the change in measured correlation via these various time steps and use our findings in order to introduce the concept of inferred correlation and the term structure of correlation. We finally illustrate our findings through the example of the relation between oil and BP, and present a few potential applications in the financial industry ( download relevant paper 1, download relevant paper 2).

Expertise in Risk at the Portfolio Level

In a ever more intricate social and financial network, the impact of the subprime crisis and the resulting uproar has pressured politicians and regulators to find rapidly conservative solutions that would address the liquidity crisis which was the signature of that financial crash. The first proposal was to push for higher capital requirements on the financial institutions so that in situations in which a big loss occurs, each institution has enough reserves to pay its dues even considering low probability events and leveraging. However, these new capital requirements have had for immediate side effect the closure of many profitable desks like in high volatility markets such as commodities. Given that the capital requirements are directly linked to Initial Margin calculation the regulators have pressured the Clearing Houses to come up rapidly with methodologies that would alleviate some of these capital requirements through diversification benefits. Cross margining between types of assets (Equities, Commodities, Rates, FX) and form of the asset (linear products, options) are currently the best response to this call for diversification benefits encouraged by the regulators. However, its implementations has proved much more challenging than expected. The Fundamental Review of the Trading book (FRTB) is at the core the latest Basel committee of banking supervision. EQRC is currently very involved in these new challenges exposed by the regulators ( download relevant paper 1, download relevant paper 2).

Thank you for your interest

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